Funds of a short-to-medium duration of two-four years seem to back in focus, with industry executives believing this is the right time to rejig portfolios.
Despite the recent 25-bps rate hike, the RBI’s ‘withdrawal of accommodation’ stance came as a surprise to some. This indicates further rate hikes, and thus a reduction in NAVs owing to a fall in prices. However, fund managers remain unfazed.
According to Mithraem Bharucha, fund manager at Bank of India MF, with the RBI saying that the real policy rate getting into positive territory and inflation moderating, we may have a very marginal or zero rate hike. This should result in easing of the short-term rate to some extent, and the yield curve getting some of its steepness back.
“Even if yields do rise, prices won’t fall to a large extent and there won’t be much of a mark-to-market loss,” he said, adding, “Hedging in these duration funds makes sense, considering there is the possibility of a rate hike not happening that could push yields down and prices up.”
Further, with most of the uncertainty driving rates and duration calls now behind, some recommend adding duration to portfolios in a staggered manner.
A note by Axis MF says the current yield curve presents material opportunities for investors in the 4-year segment, given that it offers significant margin of safety considering the steepness of the curve. “For those with a 3-year-plus horizon, incremental allocation to duration may offer significant risk-reward opportunities. Spreads between G-Sec/AAA & SDL/AAA have widened over the last month, which could make a case for allocations to high-quality corporate credit strategies. Lower-rated credits of up to 18-month maturity profiles are ideal ‘carry’ solutions in the current environment,” said the note.
Interestingly, the ultra-short duration category saw Rs 1,765-crore inflows in January, while the low-, short- and medium-duration categories lost Rs 776 crore, Rs 3,859 crore and Rs 76 crore, respectively, to outflows.
This was the fifth straight month of outflows for low- and short-duration funds and the sixth consecutive month of outflows for medium-duration funds. On the other hand, ultra-short duration has seen inflows for three of the last six months.
Industry experts said while the Budget and MPC meet kept investors cautious till January, the clarity following conclusion of the two events has made the time ripe for increased allocation to short- and medium-duration categories.
“The current yield curve has the highest yield at 4-year maturity paper today. Further, the yield on corporate duration funds provides a small alpha over G-Sec yields. Therefore, a duration fund with a 4-year maturity is a good bet. This is a good time as we are at the peak of the interest rate cycle, and entering now with a 4-year horizon would give the highest yield-to-maturity,” said Dilshad Billimoria, board member, Association of Registered Investment Advisers.
However, fund managers’ views on increasing bets in these categories may not be totally accurate, say others.
Dhirendra Kumar, founder-CEO of Value Research, an investment research company, said fund houses’ view is slightly misplaced. “The RBI’s task is to keep an eye on inflation, and they will always keep a conservative view. Fund houses may believe that adding duration funds to portfolios may be beneficial, but this kind of optimism may not always be the right call,” said Kumar.
